Are you buying a new home and need a mortgage to foot the bill? Then you should know about mortgage protection insurance.
Mortgage payment protection insurance is designed to help you in paying your bills and staying in your home if you are not able to work. There are various policies available in the markets which provide cover for specific scenarios.
What is Mortgage protection?
Mortgage protection, also known as mortgage payment protection insurance (MPPI) and income protection, are types of policies designed to replace your income if god forbid you suffer from an accident, illness, or end up unemployed.
Alongside mortgage protection, there is also life insurance, which can pay off your mortgage if you passed away, leaving behind a partner or dependents. Click here if you want to know more about life insurance.
What are the types of mortgage protection?
- Income protection –Income protection will replace a part of your income if you are unable to work due to an accident or if you cannot work due to an illness. Though you can also find a policy which includes cover if you are made redundant, it will cost you more. You can get a long term income protection policy which will be valid till you are retired. Conversely, you can get a shorter-term income protection policies, which are cheaper and only payout for a specified period.
- Mortgage payment protection insurance (MPPI) – This type of mortgage protection will cover your mortgage repayments for up to 2 years, in case you lose your job or suffer an accident or an illness due to which you are unable to work.
- Critical illness – This type of policy will pay out a lump sum amount if you develop a severe medical condition. The types of medical conditions covered are specific, so you should check which is included and which is not.
Is it compulsory to get mortgage protection?
No. Though, it is not compulsory to have mortgage protection, you should plan out for such scenarios.
Do you need income protection?
Income protection will give you the peace of mind knowing that your monthly income is covered in case you are unable to work due to an accident or illness. For an extra cost, some policies may also provide cover in case of involuntary redundancy.
Generally, income protection policies cover up to 65% of your gross salary. You will not have to pay any tax on the monthly payout, and you should also qualify for state benefits such as Employment Support Allowance.
How much will it cost to get income protection?
The amount you will be paying depends on your age, profession, whether you smoke, your health, weight, family medical history and the range of conditions you want to be covered. Additional factors include the portion of the income you want to be covered, and when the payouts will kick in.
What should you know before you buy an income protection policy?
Payouts waiting time
Generally, policies have an excess period and a minimum claim period. When you add them together, you will get the time when you will start receiving payouts. The total waiting time is generally up to a year, although it can be more.
Check your contract of employment
You should speak to your employer and check your contract of employment as sometimes some employers may pay for an income protection policy so you may not have to buy that income protection policy.
Short term or long term income protection?
Short term income protection is significantly cheaper, but it will only provide cover for a fixed period. On the other hand, long term policies will keep paying out till your return to work or reach the age of retirement.
Pre-existing medical conditions
Generally, insurers will not provide cover for pre-existing medical conditions or where you knew that you were facing a risk of redundancy when you were taking out the policy.
Should you buy income protection with your mortgage?
If your mortgage lender is offering you income protection with your mortgage, you should make sure that he is not tied to a particular insurer and will get you the best deal in the market. So shop around and compare the various insurance policies you come across.
What are MPPI and PPI?
Mortgage payment protection insurance is useful and cheaper than income protection. It is not the same as PPI.
Further, as MPPI is cheaper than income protection, it is not as extensive as income protection. So if you are getting an MPPI, check the terms and conditions carefully.
Whereas income protection will replace most of your income, MMPI will only cover your mortgage payments for a specified period set out in the policy.
Critical illness cover
Critical illness cover will help you pay off your mortgage in case you are diagnosed with a severe medical condition and due to which you are unable to work.
It does not cover your income but pays out a tax-free lump sum if you are diagnosed with an illness listed in the policy.
It is similar to life insurance. You can either choose long term cover, which is more expensive or decreasing term cover in case you have a repayment mortgage.
Further, you can also buy critical illness cover as an add-on to life insurance.
Family income benefit
Family income benefit is a kind of life insurance which will pay out regular tax-free income on the death of the policyholder.
Click here if you want to learn about the different types of mortgages.